Drucker was extremely ethical in his outlook and all he did. On a personal level he was one of the most ethical individuals I have ever met. However from both his writing and classroom lectures, it was clear that he struggled mightily to arrive at basic ethical principles which were essential since he believed that ethical behavior was an absolute requirement of all organizational leaders, and his study of leadership led him to the conclusion that while followers would forgive a leader much, they would not forgive the leader a lack of integrity.

The Concepts of Integrity, Ethics, Morality, Honor, and the Law

The concepts of integrity, ethics, morality, and honorare closely related, but they are not the same. Integrity means adherence to a moral code. Ethics in the context of leadership has to do with rules or standards governing standards of conduct for an individual or members of a profession. It can also mean adherence to moral values. So integrity has to do with adherence to standards of ethics. Drucker defined honor as demonstrable integrity and honesty, adding that an honorable man stood by his principles.[1] All of Drucker’s books contained evidence of considerable concern with these concepts.[2]

However, Drucker made an important distinction. The law may have very little to do with any of these concepts. He made it clear that the law and ethics are not the same and gave us two examples. Until the 1860’s slavery was legal in the United States. Moreover, in the Dred Scott decision of the late 1850’s, the Supreme Court ruled that no African-Americans, not even free African-Americans, could ever become citizens of the United States. According to the law, the Declaration of Independence did not refer to them, nor did the U.S. Constitution offer them any protection. So, if you maintain that the law and ethics are the same, you would have to say that if you in any way attempted to subvert the law to award Constitutional rights to African-Americans in those days, you would not only be in violation of the law, you would be unethical.

His second example concerned Hitler’s Germany. Under Hitler, Germany passed the Nuremberg Laws which denied German Jews the rights of German citizenship and passed other restrictions on them. As a German citizen, if you attempted to circumvent these laws or violate them directly, say by marrying a Jew, officiating at such a marriage, assist a Jew in the practice of his profession, or failing to report any violation of the laws to the authorities, you would be sent to prison or worse because you were in violation of the law. Were these violators of the law unethical? We can expect to be punished if we fail to obey a law whether it is a good law or a bad one, but it has nothing to do with ethics.

Drucker’s Early Struggles with Unethical Leadership

It was an ethical issue which caused Drucker to struggle with the whole concept of leadership. Forced to flee Germany at the ascent of Hitler, he was well aware of the excesses and brutality of the Nazis in both Germany and Drucker’s own native Austria even prior to the start of World War II. Hitler, who had taken the very title of “Fuehrer” or “Leader” clearly did not demonstrate ethical behavior and could not be called a man of integrity or honor. Drucker found other dictators, Mussolini, Stalin, and Mao equally wanting in this regard.

As a result, Drucker’s first approach was to largely ignore the importance of leadership and to assume that it was a concept which was so basic that there was nothing new in it that hadn’t been known since the ancients. He even wrote in 1954 that “Leadership cannot be taught or learned.” It was in this context that Drucker analyzed and rejected a commonly held view of business ethics; to wit that the ordinary rules of ethics do not apply to business. Drucker took a decidedly contrary view. He wrote that personal values of right and wrong should not be separated from values put into practice at work.[3] However he took an entirely different tack from what most experts say about business ethics.

Drucker’s Analysis of Business Ethics for the Leader

Drucker looked at ethics from various viewpoints. He began with ethical authorities from the western tradition found in the Holy Scriptures of the bible through modern times. He found one point of complete agreement with this approach: that there is only one ethics, one code of individual behavior in which the same rules apply to everyone alike. However there were various types of extenuating circumstances within this tradition. First, clemency might be granted to a violator who commits violations of the code under extenuating circumstances. “Thou shalt not steal,” is one of the Ten Commandments. Yet a mother stealing to feed a starving child might be excused. Differences due to different social or cultural mores might also be accepted. That is, practices of questionable morality in one locality might not only be considered acceptable, they could be considered quite ethical.[4]

A Japanese CEO Shocked at U.S. Laws Preventing Ethical Duty

Drucker told a story in class supporting this view, I’ve not forgotten it, as a matter fact, I have used it myself when teaching ethics to illustrate this point and in several of my books:

A large Japanese corporation decided to open an American manufacturing plant. This would bring many jobs to the area and many states and city locations vied for the opportunity. After an investigation of various locations in several different states, and considering a number of proposals, a particular site was decided on and after negotiation with local and state officials, the announcement was made. So significant was this event that the president of the Japanese corporation flew in from Japan for the ground breaking. The local government scheduled an elaborate ceremony with attendant publicity. They invited the state’s governor and many other senior state officials as well as company officers and other dignitaries.

The Japanese president spoke English; however, to ensure that everything he said would be understood, the company hired a Nisei, or second generation American of Japanese descent. This woman held an advanced business degree and was fluent in both Japanese and English. She would translate his speech into English as he spoke.

With dignity and measured tones, the Japanese president began to speak, noting the great honor it was for his company to be able to locate at this particular locale in the United States. He would speak a couple paragraphs, and then the interpreter would translate his remarks into English.

The Japanese executive noted the mutual benefits to his company, to the area’s citizens, to the local economy and to Japanese-American friendship. Then, nodding in the direction of the governor and other state and local officials present, he said: ‘Furthermore, Mr. Governor and high officials, please understand that our company knows its ethical duty. When the time comes that you retire from your honored positions, my corporation will not forget what you have done and will repay you for the efforts which you have expended in our behalf in giving us this opportunity.’

The Japanese-American interpreter was horrified. She made an instantaneous decision and omitted these remarks in her English translation. The Japanese CEO, who understood enough English to realize what she had done, but not why, continued his speech as if nothing had happened. Later, when the two were alone, the CEO asked his interpreter, ‘How could you exclude my reassurances to the governor and other officials regarding our ethical duty? Why did you leave this important statement out of my speech?’ Only then could she explain to his amazement that what is ethical, even a duty, in Japan is considered unethical and even corruption in the United States. On hearing this, the Japanese CEO agreed that the interpreter had acted correctly and that in accordance with the American view of ethics in this instance, in addition to which of courses what was considered an ethical duty in Japan would not be done here and American laws would be obeyed.

Drucker went on to explain further why the actions of the Japanese CEO would be considered an ethical duty and neither unethical, nor unlawful in Japan. “In Japan,” Drucker told us, “government officials are paid very little. They could live on what they receive in retirement only with great difficulty. It is therefore expected that when they retire, companies which have benefited from their actions during their tenure will assist them, financially and otherwise. Since they could barely get by on their retirement, this is considered the only right and ethical thing to do.” Drucker concluded that the Japanese CEO acted correctly in that since this was unethical, and moreover illegal in the U.S. the American view would be followed.

Drucker on Extortion or Bribery

Drucker noted that bribery was hardly desirable from the viewpoint of the victim from who a bribe was exhorted, and it had recently been made illegal in the United States by a law prohibiting the payment of bribes to obtain foreign contracts. This started with an American company, Lockheed Aircraft. Senior Lockheed executives paid bribes to members of a Japanese government when money was demanded in exchange for subsidizing the purchase of the L-1011 passenger jet for All Nippon Airways. As a result Lockheed Chairman Daniel Haughton and Vice Chairman and President Carl Kotchian were forced to resign from their posts in disgrace early in 1976.[5] They gained nothing personally from the sales of the L-1011 in any way. Why did these two Lockheed executives commit such a stupid act?

In the years 1972-73, 25,000 Lockheed employees faced a significant threat of unemployment after cutbacks in the U.S. government order of military aircraft and missiles. Because of delays due to difficulty with the foreign supplier of the L-1011’s engines, All Nippon Airways was the only major airline which had not already made a commitment to purchase a wide-body jet from a competitor. If a major contract could not be secured for the L-1011, many jobs at Lockheed would have been lost.

The two executives gained not a cent in monetary or any other advantage from their act which was committed solely to help workers and in the interests of social responsibility. Had Lockheed simply abandoned the L-1011, instead of paying the bribe, stock price analysts determined that company earnings, stock price, and bonuses and stock options for the two Lockheed executives involved would have substantially increased. Everyone knew that because of the delays the L-1011 was a loser and could no longer make money. In fact the project never made any money despite these and other sales. This was cited as a gross violation of “business ethics.”[6]

Drucker was very clear on this. He thought it stupid to pay bribes. He thought out of good management the L-1011 project should simply have been abandoned. But was this a violation of the law or of business ethics? Most countries have laws against bribery. Yet it is a fact that bribery, as we define it, is routine and expected in some of these countries. Many would perceive that the promise, or at least the understanding, of the Japanese CEO that his company would reward government officials who helped his company while they were in office to be a form of bribery. But everyone in Japan, understands the difference. In other countries that expect “baksheesh” in as the traditional way of doing business in their country ignore any laws that may have been enacted as “window dressing” for countries not having this as part of their own culture.

Drucker noted that a private citizen who was extorted to pay a bribe to a criminal might be considered stupid or a helpless victim of intimidation. And certainly paying extortion was never desirable. But this was clearly not an ethical issue on the part of the individual forced to pay. Drucker strongly objected to this “new business ethics” which asserted that acts that are not immoral or illegal if done by private citizens became immoral or illegal if done in the context of a business organization without examining the circumstances. They might be stupid, they might be illegal, and they might be the wrong thing to do. However, they were not necessarily “business ethics.”

The Ethics of Social Responsibility

Drucker next turned to casuistry. This might be called cost-benefit ethics, or ethics for the greater good. Essentially it says that someone in power, a CEO, a king, a president, has a higher duty if their behavior can be argued that it confers benefits on others. So, it is wrong to lie, but in the interests of “the country” or “the company,” or “the organization,” it sometimes has to be done. Drucker called this “the ethics of social responsibility.” From a casuist’s view, the bribe paid to the Japanese officials by Lockheed executives was a duty, a higher responsibility since Lockheed’s leaders were trying to take care of Lockheed employees, not to benefit themselves. This sounds very high minded, but Drucker maintained that it was too dangerous a concept to be adopted as business ethics because it would become a tool of a business leader to justify what would be clearly be unethical behavior for anyone else.[7] Drucker looked further.

The Ethics of Prudence

To be prudent means to be careful or cautious. It is a rather unusual philosophy for an ethical approach, but admittedly it has some benefits to it. When I first became a Air Force general, we were sent to a special course for new generals. During this course we were given lectures and advice by senior military and civilian leaders. I do not recall whether what was said on this subject was said by the Secretary of Defense, or by a senior general, but it struck us as pretty good advice. “Never do anything you wouldn’t want seen on the front page of The Air Force Times,” he said.

Drucker gave a somewhat similar example. He said that Harry Truman, at the time a U.S. Senator gave this advice to an Army witness before his committee in the early years of World War II: “Generals should never do anything that needs to be explained to a Senate Committee – there is nothing one can explain to a Senate Committee.[8]

Now this approach may be pretty good advice for staying out of trouble, but it is not much of a basis for ethical decision making. For one thing, it doesn’t tell you anything about the right kind of behavior. For another there are decisions that a leader must take which are risky and which may be difficult to explain, especially if things go wrong. But, they are nevertheless the correct decisions to take.

The Ethics of Profit

Drucker also thought through what he called, “The Ethics of Profit.” Now this is not what you might think, so don’t skip this. Drucker did not say anything about limiting profits. Much to the contrary, Drucker wrote that it would be socially irresponsible and most certainly unethical if a business did not show a profit at least equal to the cost of capital because failing to do so would waste society’s resources.[9]

Drucker believed that the only logical rationale for the justification for “profit” was that it was a cost. He exhorted business leaders as follows: “Check to see if you are earning enough profit to cover the cost of capital and provide for innovation. If not, what are you going to do about it?”[10]

Drucker stated that profit as an ethical “metric” rested on very weak moral grounds as an incentive and could only be justified if it were a genuine cost and especially if it were the only way to maintain jobs and to grow new ones.[11]

I found it interesting that during the rise in gas prices (prior to their dramatic fall) in 2008 produced the following response by one refining company CEO when challenged by a Congressional investigating committee: “There is no ‘profit’. Every dollar goes into to exploration or research and development and is needed to run this business.” Drucker would have agreed, although this would have probably been extremely difficult for someone not in the oil business to understand or accept, and clearly did not satisfy the Committee, confirming Truman’s advice to his generals.

Confucian Ethics

Drucker called Confucian ethics “the most successful and most durable of them all.” In Confucian ethics the rules are the same for all, but there are different general rules which vary according to five basic relationships, all based on interdependence. These five are superior and subordinate, father and child, husband and wife, oldest brother and sibling and friend and friend. The right behavior in each case differs in order to optimize the benefits to both parties in each relationship. Confucian ethics demands equality of obligations, of parents to children and visa versa; of bosses to subordinates and visa versa. All have mutual obligations. Drucker points out that this is not compatible with what is considered business ethics in many countries including the U.S. where one side has obligations and the other side rights or entitlements. Though he clearly admires Confucian ethics which he calls “The Ethics of Interdependence,” they cannot be applied as business ethics, because this system deals with issues between individuals, not groups. According to Confucian ethics, only the law can handle the rights and disagreements of groups.[12]

But what about doing things in business that are “clearly unethical?” Can business ethics be defined in this manner? This came up in class, and I also found his identical response in one of Peter’s books: “Hiring call girls to entertain visiting executives does not make you unethical. It merely makes you a pimp.”[13]

Drucker’s Conclusions

Drucker concluded that business ethics as we know it today are not that at all. If ever business ethics were to be codified, Drucker thought they ought to be based on Confucian ethics, focusing on the right behavior rather than misbehavior or wrong doing. In the meantime, Drucker believed that leaders should adopt the following into their personal philosophy of ethics:

1.The ethics of personal responsibility from the physician Hippocrates:

“Primum Non Nocere.” Which in English means, above all (or first) do no harm.[14][15]

2.The mirror test: What kind of person do I want to see when I look into the mirror every morning?[16]

Drucker’s Thoughts on Ethics for Leaders

·There are many different approaches to ethics, none of them are 100% compatible with what we consider business ethics in the United States today.

·Confucian ethics, that is, the Ethics of Interdependence, probably comes closest to the ideal for what might be called organizational ethics, but not under current laws and thinking.

·While every leader needs to “do what’s right,” since this cannot be defined exactly, above all do no harm, and work on passing the mirror test.

[2] For a more complete analyses of these struggles, see Schwartz, Michael, “Peter Drucker and the Denial of Business Ethics,” Journal of Business Ethics, (November 1998) v.17, Issue 15, pp.1685-1693. However, I disagree with the author that Drucker denied “business ethics.”It is just that Drucker’s definition of what constituted business ethics was different than others; in fact that he created his own..

[15] Although Drucker, and other too, declare to be part of the Primum Non Nocere part of the Hippocratic Oath, This is not true. See Wikipedia at http://en.wikipedia.org/wiki/Primum_non_nocereand other references. I will discuss this further in chapter 10.

Bill Cohen’s Drucker on Leadership is the best collection of Peter Drucker’s unique insights, deep wisdom, and practical advice I have ever read. Cohen channels Drucker as only a three decades-long colleague and student can. You will find the lessons highly accessible, immensely enjoyable, and wonderfully fresh. – Jim Kouzes, Award-winning co-author of the bestselling, The Leadership Challenge

Cohen has written with clarity and authority about the major challenges facing leaders today. And Cohen, like Drucker, emphasizes responsibility and integrity in leadership, qualities so desperately needed today. I strongly recommend this book to you. – Joseph A. Maciariello, Horton Professor of Management, Peter F. Drucker and Masatoshi Ito Graduate School of Management and Co-Author of The Daily Drucker by Peter F. Druckerand Management by Peter F. Drucker

Cohen’s unique relationship with Peter Drucker, as student and friend, allows him to extract valuable leadership lessons from Drucker’s writings and teachings on management. Bill Cohen’s “labor of love” provides the essential lessons for leaders straight from the Father of Modern Management. – Ronald E. Riggio, Henry R. Kravis Professor of Leadership and Organizational Psychology, and director of the Kravis Leadership Institute at Claremont McKenna College

For those who aspire to lead – and we need a new generation of Drucker— like leaders in organizations in every country around the world — Bill Cohen distills the essential leadership lessons from the world’s greatest management thinker. – Ira A. Jackson, Dean and Professor of Management, Peter F. Drucker and Masatoshi Ito Graduate School of Management

Through a blend of anecdote and analysis, Bill Cohen has given us great insight into Peter Drucker’s thinking on leadership—an aspect of Drucker’s work that many have misconstrued or overlooked altogether. This is a new prism through which to view Drucker and, as such, a valuable contribution to the field. – Rick Wartzman, Executive Director, The Drucker Institute

What Cohen learned as Peter Drucker’s student, and their personal relationship afterwards, changed Bill’s life. Reading Drucker on Leadership will change the way you look at and apply leadership forever. –Bruce Rosenstein, author of Living in More Than One World: How Peter Drucker’s Wisdom Can Inspire and Transform Your Life

I read Dr. Cohen’s books in Chinese, and with the help of a translator, reviewed a draft of Drucker on Leadership in English. Peter F. Drucker helped me found the Peter F. Drucker Academy in China. It was a pleasure to see his concepts and what he instructed me brought together in one place and explained so that they could be applied by any executive. This is a valuable and useful book. –Minglo Shao, Chairman and CEO of the Bright China Group, Founder of the Peter F. Drucker Academy

For more information, contact me directly by e-mail at wcohen@stuffofheroes.com or telephone (626) 794-5998. Yes we do give international seminars — The U.S. country code is 01.

THIS MONTH’S THOUGHT FOR LEADERS

Knowledge workers will forgive a leader much, but they will not forgive him for a lack of integrity.